Systematic Trading: using Probabilities to gain the edge.
- Why do most trading plans fail? You’ve probably wondered why this happened and how you can avoid it.
- Why does your plan Over-Promise and Under-deliver? Are you on a search for the Holy Grail?
For answers to this and other questions read on…
Your Trading Programs Always Break Down
Novice traders tend to focus on hindsight. The past always seems to be lurking in the midst of the next trade. Any successful trader will tell that loosing is all apart of the game. But why do most trading methodologies claim success, yet when you apply the same strategies they do not seem to bode the same results? The answers lies in the execution.
A Systematic Approach – Using Probabilities to your advantage.
Probability is simply a way to explain Randomness. According to Newton there would be no such thing as probability if all conditions were known. In turn, I find that there is no better explanation of markets than, “Randomness”. However, logic is an inherent characteristic to human-beings. Because we live in a world of Randomness we have developed a tendency to rationalize. A tendency to rationalize trades and back those decisions with facts that undeniably favor our opinion. I think that is a very key point for most traders to understand. There is no Right or wrong in trading. No one can predict the future.
You might ask:” Then why are there so many traders and gurus who claim that their methodology is the best thing since sliced bread?” Well! The answer is that there is validity to what most of these so called experts have to say. However, their execution is most likely the difference.
Hopefully if they are writing about their methods they believe in them (which I realize may not be the case) and in turn this allows them to “Systematically” execute them over and over again. Novice traders on the other hand are constantly on a search for the next best thing. The Concept of Probabilities is often much easier to grasp than to apply in one’s trading. Allowing probabilities to work to one’s advantage is often easier said, than done. Having the poise to implement probabilities into one’s trading is a refined skill that takes a lot of practice. However, with the onset of program trading anyone can buy, program, implement, and trade using these principles.
For example, utilizing an Automatic Trading Program like our Systematic Swing Trader Program ; Which is built around principles of probabilities and money management.
To Rationalize or not to rationalize? That is a good question.
As human beings rationalizing is a part of who we are. You have no choice. Therefore, you must then come to the grips with the fact that logic does not necessarily mean that you are correct. It simply means that you have come to a conclusion based on logical reasoning or organization of the information available to you, in order to make a decision. Therefore, this means that you have just as much of a chance of being right as being wrong. It is the first step to understanding your trading and developing your poise.
Step 2: It’s All About The Money Management:
Any professional trader will tell you it’s not about how you get into a trade, but how you get out of it. Therefore your second step is to then place supreme importance on properly managing the exit strategy of each position. These may seem likely blatantly obvious concepts to some; however, often they are grossly neglected. Many traders, to often forget what their goals are in trading: TO MAKE MONEY!!!!
Many traders get caught up in the thrill of the trade and they let there inner urge to prove themselves right over anything else take over, rather than focusing on making money. This is most easily accounted for by a lack of poise and discipline. Because probability say that you can just as easily be wrong on the next trade as you can be right. Therefore you must remain constant in your methodology and manage risk when probabilities are not in your favor. You must stay steadfast in your belief that eventually the probabilities will turn back in your favor.
Uncertainty And Your Trading:
How many times have you had a trade on with a moderate profit and decided not to bank it, only to watch the market reverse against you, turning that trade into a loss?
Then the next time you have a small profit, you book it immediately, only to watch the market scream higher, leaving you wishing you were still in the market.
So what’s the right way to handle it? Both!
Multiple Position Scaling:
In our research we have found that using multiple levels of money management allows for better use of probabilities.
Our 1st target has been optimized in order to achieve a high degree of success, we have programmed our system to exit part of a position if any given trade achieves moderate profits.
Our 2nd position is designed to maximize risk vs. reward ratios, so you’re not left on the sideline wondering why you missed the big move!
Finally, the 3rd position has a trailing stop rather than a target. This is because it is designed to catch that runaway market that just keeps going further that you ever Expected.
Each of the three examples above entered the market using the same entry methodology. However, they used a different money management approach employed to ensure that they caught each move, small, medium and run-away!
Your existing system claims 80-90% success rate!
But, does it make you money? If it’s like most programs out there, it probably over-promises and under delivers! There are exactly 3 scenarios where a system yields success on 80-90% success.
- The first is the most obvious, fraudulent claims from unregulated, unprofessional companies.
- The second, isn’t fraudulent, but just as useless to you as an investor; the system was either curve fitted or market conditions were perfect for that system for a very small period of time, allowing the program to falsely look like it couldn’t missed. When conditions change, the system fails.
- Lastly is the holy grail program! This program really does have 10x as many winners as losers! Problem is, the losers tend to be 20x as big as the winners! So where does that leave you?
Are You On the Quest For The Holy Grail? It Doesn’t Exist!
If so, I don’t even have to ask, your trading has not been successful.
- If you’ve been looking for that system with 80% or greater success, you’re on the quest!
- If you refuse to let losing trades go, but cut your winners short, you’re on the quest!
- If you’re looking for perfection and not performance, you’re on the quest!
Stop trying to find the perfect trading system, this is what novices do. Instead, design, create, or buy a system that focuses on probabilities and apply these principles to Systematically attack the markets.